People power: Arab economies in a global era

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For two generations, the economic performance of the Arab countries of the middle east has been middling. It has been worse than east Asia, better than sub-Saharan Africa, and about the same as Latin America and south Asia. Yet while there has been no crisis in the past - indeed, on some social indicators progress has been spectacular - the region now faces an imminent challenge: how to create jobs for the large cohort of young people reaching working age. The task is immense and the stakes are high: over the next decade or so, the region may experience population growth of 150 million people - the equivalent of adding two Egypts. Rising labour-force participation by women only increases the pressure. The region is a demographic time-bomb.

Marcus Noland is senior fellow at the Institute for International Economics. Among his books are Avoiding the Apocalypse: The Future of the Two Koreas (IIE, 2000) and (with Stephen Haggard) Famine in North Korea: Markets, Aid, and Reform (Columbia University Press, 2007)

Howard Pack is professor of business and public policy at the Wharton School at the University of Pennsylvania. His work includes Industrial Policy in an Era of Globalization: Lessons from Asia (Peterson Institute, 2003) - with Marcus Noland

This article draws from Marcus Noland & Howard Pack's newly published book, Arab Economies in a Changing World (Peterson Institute, 2007) The picture is not entirely bleak: underpinned by relatively high oil and gas prices, the region as a whole has exhibited both steady growth of income and employment of late. The small emirate of Dubai appears bent on establishing itself as the Singapore of the middle east. But whether the current level of energy prices will be sustained is an open question and in any event the impact of this windfall is felt unevenly across the Arab world, where some of the most populous states are not well-endowed in oil. Measured unemployment is decreasing. There may be some rot beneath the veneer, however.

Remarkably, the net increase in employment over the past five years is accounted for entirely by women. The increase in employment opportunities for women is encouraging. But the stagnation of male employment is worrisome and in some countries - including Jordan and the oil-exporters of the Gulf - most of the newly created jobs have been filled by foreigners. This phenomenon is even more acute if one looks at private-sector employment, and there is some evidence of warehousing people in public-sector employment, particularly in the Maghreb. With a few exceptions, employment has not been growing in industries where productivity is increasing - that is, it does not appear to reflect an expansion of activity in rising dynamic sectors.

One method of rapidly creating a sustainable increase in employment is through an expansion of labor-intensive manufacturing or services exports, often in conjunction with foreign investors or local entrepreneurs integrating into global supply networks. But outside the petroleum sector, the region's track-record is inauspicious. Not just in comparison with China or India: in one recent year the Philippines generated more manufactured exports than the entire Arab world. And until the recent oil-fuelled expansion of intraregional foreign direct investment (FDI), the region typically attracted less FDI than Sweden. Even this recent surge in activity appears to be concentrated to a significant extent in so-called "non-tradable" sectors such as real-estate development that could be highly vulnerable to a downturn in the oil market or a contraction of global liquidity. The Arab world risks being left behind at precisely the moment it needs to accelerate job growth.

From time-bomb to dividend

Achieving that goal is inhibited by two factors: institutional and political. The Arab countries score poorly on a nexus of indicators relating to cross-border economic integration and the transfer, dissemination, and application of technological knowledge and innovation. Partly this would appear to reflect weak inputs: Arab students have generally not performed well in a variety of international comparisons of educational achievement, including the most recent Trends in International Mathematics and Science Study, a quadrennial survey of achievement among eighth graders. And no Arab university appears in international rankings of universities, or rankings of specifically science or engineering universities.

Outside of the extractive industries and tourism, where geology or special attractions like the pyramids confer unique and irreproducible advantages, as a group the Arab countries have weak links to the global economy - whether measured by in terms of merchandise trade, import of capital goods (which embody technological advances from abroad), cross-border investment, integration into trans-border supply networks, technology licensing, and internationally recognised intellectual achievements. In short, the neural synapses that would link the latent productive possibilities of the Arab people with the goods and services demanded in the global market appear to be weak or non-existent.

Building such links presents a formidable challenge. Unlike issues of macroeconomic policy management - where policy change can be implemented by a relatively small number of centrally placed technocrats and is subject to relatively straightforward feedback mechanisms to facilitate benchmarking progress - addressing the institutional weaknesses requires a much more prolonged and uncertain slog.

The hesitancy to reform stems from concerns more fundamental than mere special-interest politics. While the region's contemporary economic performance may not be distinctive, its enduring political authoritarianism is. This lack of political dynamism in the face of underlying social change together with the increasingly religious orientation of the political opposition paradoxically raises the possibility of abrupt transitions or regime changes. Intermittent terrorist incidents further elevate the risk premium. Such deep political uncertainty discourages behaviour that involves irreversibility - from investment to a reversal of the brain drain - and creates the possibility of a self-reinforcing downward spiral.

Yet substantial intra-regional variation in achievement along many of the relevant benchmarks suggests that these outcomes are not determined by intrinsic cultural factors. The influence of Islam or the anthropology of Arab culture may have many effects on local institutions and practices, but they cannot explain why it takes fifteen times as long to enforce a contract in Egypt as it does in Tunisia. Significant improvements in economic outcomes could be achieved by simply matching the best practice standard established by others within the region. Egypt need not turn into Norway.

The middle east has long been a politically contested region of global significance. The demographic pressures the region faces to productively employ its young people entering the labor force raise the stakes even higher. It is not difficult to envision the region caught in a downward spiral where impoverishment, discontent, militancy, and repression feed upon one another, deterring reform and impeding growth.

Yet this is not the only possible future path. If the region's daunting employment challenge can be successfully addressed, the region's demographics could turn from a potential liability to a valuable asset. The Arab world could reap a demographic dividend as the new generation enters its most productive working years - a phenomenon that contributed to the outstanding performance of east Asia over the past four decades or so. Growing prosperity, confidence, and optimism about the future could underpin movement toward greater political openness and social tolerance. The region's young demographic could then turn from a potential liability to a bonus.